What Happened? Or Rather What Didn’t

A week of roller coaster action that this trader did not foresee. I try to stick to the knitting, and place my trades ±45DTE (days to expiry). Thus Wednesday’s drop looked opportune- volatility at 18%– not bad, I’m thinking. I’d put in a cheeky offer. (Tuesday gave rise to the idea of closing out all positions for almost no cost). My call and put positions had done ok, and ‘gut’ told me to close out. Head said ‘stick to the plan’. I might still have taken that same trade on Wednesday. However on Thursday morning unbeknownst to me I now had a new January put position, for credit of 24,now 60,and my existing Dec put position? Could have closed out for 7, now trading at about 40. The call position could have been closed out for 7.

I sincerely hope anyone reading this is safe. The weekend is a good time to review and look at your option options-rolling/closing/partially closing. The pro trader would be filling proverbial boots after thursday’s action- I mean just look at that vol! It shouts SELL THE FARM! And I was once told perceived wisdom is to sellcallsANDputs when vol explodes. The logic being that vol will contract in a few days,though the market might shoot up and clobber yer calls.

The Week’s Events

I’m sure we are all aware of the Huawei situation, the EU, France, oil prices, bond yield inversion, interest rate hikes, non farms etc. Curiously the job numbers overshot last month by about 50,000, this month undershot by 44,000.I have always thought them a little unreliable but this is a big swing in the wrong direction. Does this mean the FED may stop raising rates? That might create a huge upswing, or……. the markets might see it as a sign of panic. We all seem to be factoring in a recession in 2019/2020. It makes no sense to try and predict and that is not our remit here. I get these emails andhighly recoemmend them: http://tradingdiary.incrediblecharts.com/2018-12-07-markets-economy-gold.php

We try to have rule based trading, and manage risk. So what’s the latest on current trades?

Historic Trades

Starting with last week’s Trade 108– overall debit of 18.5,and incredibly it has only lost4. Now the Dec 6500puts= 45.5(x2) the 7300Calls3.5(x2). Jan puts93.5, calls19.5. Tuesday 04Dec this trade was 30% in profit. Again I’d double up on this trade, given the high vol, but I’d maybe look at different strikes.Trade 107 the 6950 iron butterfly- now 87.5. Pretty much ok for now-but we need a blip up for this to make serious coin. When we opened it, the credit was 86.5.

Trades 105 and 106– Currently in a debit of 10 to close out.

Trade 109 Going For Broke

As previously mentioned, when you think volatility has peaked, it should thereafter contract. Assuming it is as high as it is going to go. It does not usually stay up but spikes when news happens. Then contracts when that news is digested. Usually. Who knows what kind of mess we are in currently? It’s not about us panicking, it’s about everyone else- the weak hands, or dumb money. They buy at the top and get scared out of positions, when logically they might want to think about the reverse. So…Trade 109-we are going to sell a strangle. This may be a bad idea-which is a good idea because then we can show some adjustments. Nobody wins every trade and this might be a tad crazy. We are selling the 7050 call and the 6400 put:

Note the Deltas are not equal, but I would certainly rather be short on the call side than the puts if the current status quo is that we are entering a bear market. The whole trade gives us 60.5 with 14 trading days to go.( NB edited today 11the Dec apologies – my proof reading is so bad).

Related

About the Author: First found out about options in 1995.From the arcane magazine Exchange and Mart! First trade- a covered call on VOD in 1999. Made 10%,VOD almost doubled. That's when I realised I was not a good trader,and I was forgiven thanks to the amazing world of exchange traded options

Trade 107 now valued at 76 to close out (Thurs 13th) so a small profit of 10. These are very low risk,with pre- limited margin requirements, the width of the strikes. However we risked a loss of 13.5 to get 10. We’d have margin of 100. I think that’s a win.